TMI BlogICDS III : Construction ContractsX X X X Extracts X X X X X X X X Extracts X X X X ..... ogy and function or their ultimate purpose or use. Construction contracts are formulated in a number of ways which, for the purposes of this Income Computation and Disclosure Standard, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example, in the case of a cost plus contract with an agreed maximum price. For example: A contract for rendering of services would be a construction contract provided the service contract is directly related to the construction of the asset. A contract for destruction or restoration of assets, and the restoration of the environment following the demolition of the asset i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the contractor and customer have been able to accept or reject that part of the contract relating to each asset the costs and revenues of each asset can be identified. A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when - the group of contracts is negotiated as a single package the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin the contracts are performed concurrently or in a continuous sequence. Where a contract provides for the construction of an additional asset at the option of the customer or is amended to include the construction of an additional asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied or defects are rectified. No enforceable right arises till the conditions are satisfied or defects are rectified. Till such time the right to receive vis- vis retentions is contingent in nature. [CIT v P C Constructions (P) Ltd] [ 2009 (7) TMI 35 - MADRAS HIGH COURT ] Note: Where contract revenue already recognised as income is subsequently written off in the books of account as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of contract revenue. 3. Contract Costs:- Contract costs shall comprise of costs that relate directly to the specific contract such as labour costs, cost of materials, depreciation on plant and machinery, plant and machinery hiring charges, sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. The stage of completion of a contract shall be determined with reference to the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or surveys of work performed; or completion of a physical proportion of the contract-work. A contractor could choose any one of these criteria to determine the stage of completion of contract. Progress payments and advances received from customers cannot be adopted as a criterion for determining the stage of completion of contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etion method is applied on a cumulative basis in each previous year to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods. The change in estimate would not affect the contract revenue and costs recognized in the prior years For example: AB Pvt Ltd enters into a construction contract with XY Pvt Ltd during FY 2016-17 for constructing a wind mill. The contract revenue and contract costs estimated at the time of entering the contract are ₹ 10 crores and ₹ 8.5 crores respectively. The contract revenue and costs are revised on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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